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EX-32.B - EXHIBIT 32.B - BASSETT FURNITURE INDUSTRIES INCex32-b.htm
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EX-31.B - EXHIBIT 31.B - BASSETT FURNITURE INDUSTRIES INCex31-b.htm
EX-31.A - EXHIBIT 31.A - BASSETT FURNITURE INDUSTRIES INCex31-a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 27, 2017

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________________ to _______________________

 

Commission File No. 0-209

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

Virginia                          

 

              54-0135270

 

 

(State or other jurisdiction   

 

(I.R.S. Employer

 

 

of incorporation or organization)

  Identification No.)  

 

3525 Fairystone Park Highway

Bassett, Virginia 24055

(Address of principal executive offices)

(Zip Code)

 

(276) 629-6000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes    X    No             

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    X    No             

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

         

 

Accelerated filer

   X   

Non-accelerated filer

         

 

(Do not check if a smaller reporting company)

     

Smaller reporting company

         

     

Emerging growth company

         

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes          No      X      

 

At June 16, 2017, 10,724,586 shares of common stock of the Registrant were outstanding.

 

 
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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

ITEM

PAGE

     

PART I - FINANCIAL INFORMATION

     
1.

Condensed Consolidated Financial Statements as of May 27, 2017 (unaudited) and November 26, 2016 and for the three and six months ended May 27, 2017 (unaudited) and May 28, 2016 (unaudited)

 
     
 

Condensed Consolidated Statements of Income and Retained Earnings

3

     
 

Condensed Consolidated Statements of Comprehensive Income

4

     
 

Condensed Consolidated Balance Sheets

5

     
 

Condensed Consolidated Statements of Cash Flows

6

     
 

Notes to Condensed Consolidated Financial Statements

7

     
2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

     
3.

Quantitative and Qualitative Disclosures About Market Risk

33

     
4.

Controls and Procedures

34

     
 

PART II - OTHER INFORMATION

 
     
1.

Legal Proceedings

36

     
2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

36

     
3.

Defaults Upon Senior Securities

36

     
4.

Exhibits

36

 

 
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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands except per share data)

 

 

   

Quarter Ended

   

Six Months Ended

 
                                 
   

May 27,

2017

   

May 28,

2016

   

May 27,

2017

   

May 28,

2016

 

Sales revenue:

                               

Furniture and accessories

  $ 100,294     $ 92,990     $ 193,992     $ 185,392  

Logistics

    13,831       13,677       26,025       28,148  

Total sales revenue

    114,125       106,667       220,017       213,540  
                                 

Cost of furniture and accessories sold

    44,981       42,419       86,879       84,405  
                                 

Selling, general and administrative expenses excluding new store pre-opening costs

    61,075       58,088       119,599       117,045  

New store pre-opening costs

    469       307       1,275       446  

Income from operations

    7,600       5,853       12,264       11,644  
                                 

Gain on sale of investment

    3,267       -       3,267       -  

Impairment of investment in real estate

    (1,084 )     -       (1,084 )     -  

Other loss, net

    (678 )     (600 )     (1,411 )     (1,257 )

Income before income taxes

    9,105       5,253       13,036       10,387  
                                 

Income tax expense

    3,263       1,868       4,333       3,768  
                                 

Net income

  $ 5,842     $ 3,385     $ 8,703     $ 6,619  
                                 

Retained earnings-beginning of period

    131,178       123,176       129,388       120,904  

Cash dividends

    (1,073 )     (998 )     (2,144 )     (1,960 )

Retained earnings-end of period

  $ 135,947     $ 125,563     $ 135,947     $ 125,563  
                                 

Basic earnings per share

  $ 0.55     $ 0.31     $ 0.82     $ 0.61  
                                 

Diluted earnings per share

  $ 0.54     $ 0.31     $ 0.81     $ 0.61  
                                 

Dividends per share

  $ 0.10     $ 0.09     $ 0.20     $ 0.18  

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

 
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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands)

 

 

   

Quarter Ended

   

Six Months Ended 

 
                                 
   

May 27,

2017

   

May 28,

2016

   

May 27,

2017

   

May 28,

2016

 
                                 

Net income

  $ 5,842     $ 3,385     $ 8,703     $ 6,619  

Other comprehensive income:

                               

Recognize prior service cost associated with Long Term Cash Awards (LTCA)

    (932 )     -       (932 )     -  

Amortization associated with LTCA

    24       -       24       -  

Income taxes related to LTCA

    350       -       350       -  

Amortization associated with supplemental executive retirement defined benefit plan (SERP)

    94       92       187       183  

Income taxes related to SERP

    (36 )     (36 )     (71 )     (70 )
                                 

Other comprehensive income, net of tax

    (500 )     56       (442 )     113  
                                 

Total comprehensive income

  $ 5,342     $ 3,441     $ 8,261     $ 6,732  

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

 
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PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MAY 27, 2017 AND NOVEMBER 26, 2016

(In thousands)

 

 

   

(Unaudited)

         
   

May 27,

2017

   

November 26,

2016

 
Assets                

Current assets

               

Cash and cash equivalents

  $ 29,798     $ 35,144  

Short-term investments

    23,125       23,125  

Accounts receivable, net

    19,486       18,358  

Inventories

    58,093       53,215  

Other current assets

    8,599       10,727  

Total current assets

    139,101       140,569  
                 

Property and equipment, net

    106,900       104,655  
                 

Deferred income taxes

    8,112       8,071  

Goodwill and other intangible assets

    17,512       17,360  

Other

    5,471       7,612  

Total long-term assets

    31,095       33,043  

Total assets

  $ 277,096     $ 278,267  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities

               

Accounts payable

  $ 20,858     $ 21,281  

Accrued compensation and benefits

    12,889       13,602  

Customer deposits

    22,649       25,181  

Dividends payable

    -       3,218  

Current portion of long-term debt

    3,346       3,290  

Other accrued liabilities

    11,847       10,441  

Total current liabilities

    71,589       77,013  
                 

Long-term liabilities

               

Post employment benefit obligations

    13,714       12,760  

Notes payable

    631       3,821  

Other long-term liabilities

    4,177       3,968  

Total long-term liabilities

    18,522       20,549  
                 
                 

Stockholders’ equity

               

Common stock

    53,623       53,615  

Retained earnings

    135,947       129,388  

Additional paid-in capital

    410       255  

Accumulated other comprehensive loss

    (2,995 )     (2,553 )

Total stockholders' equity

    186,985       180,705  

Total liabilities and stockholders’ equity

  $ 277,096     $ 278,267  

 

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

 
5 of 38

 

 

PART I – FINANCIAL INFORMATION – CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED MAY 27, 2017 AND MAY 28, 2016 – UNAUDITED

(In thousands)

 

 

   

Six Months Ended

 
   

May 27, 2017

   

May 28, 2016

 

Operating activities:

               

Net income

  $ 8,703     $ 6,619  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    6,706       5,611  

Provision for asset impairment charge

    1,084       -  

Gain on sale of investment

    (3,267 )     -  

Tenant improvement allowance received from lessors

    715       590  

Deferred income taxes

    318       1,198  

Excess tax benefits from stock-based compensation

    327       41  

Other, net

    960       697  

Changes in operating assets and liabilities:

               

Accounts receivable

    (904 )     2,436  

Inventories

    (4,535 )     5,062  

Other current assets

    2,128       (1,451 )

Customer deposits

    (2,532 )     (3,867 )

Accounts payable and accrued liabilities

    (211 )     (5,926 )

Net cash provided by operating activities

    9,492       11,010  
                 

Investing activities:

               

Purchases of property and equipment

    (9,172 )     (14,116 )

Proceeds from sales of property and equipment

    63       577  

Proceeds from sale of investment

    3,592       -  

Acquisition of retail licensee store

    (655 )     -  

Other

    223       -  

Net cash used in investing activities

    (5,949 )     (13,539 )
                 

Financing activities:

               

Cash dividends

    (5,363 )     (4,145 )

Proceeds from the exercise of stock options

    221       114  

Other issuance of common stock

    -       176  

Repurchases of common stock

    (82 )     (1,930 )

Taxes paid related to net share settlement of equity awards

    (474 )     -  

Repayments of notes payable

    (3,191 )     (4,920 )

Proceeds from equipment loans

    -       6,692  

Net cash used in financing activities

    (8,889 )     (4,013 )

Change in cash and cash equivalents

    (5,346 )     (6,542 )

Cash and cash equivalents - beginning of period

    35,144       36,268  

Cash and cash equivalents - end of period

  $ 29,798     $ 29,726  

 

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

 
6 of 38

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.

 

The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our wholly-owned subsidiaries of which we have a controlling interest. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

 

Revenue from the sale of furniture and accessories is reported in the accompanying condensed consolidated statements of income net of estimates for returns and allowances.

 

Revenues from logistical services are generated by our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) which we acquired in fiscal 2015. Sales of logistical services from Zenith to our wholesale and retail segments have been eliminated in consolidation, and Zenith’s operating costs and expenses are included in selling, general and administrative expenses in our condensed consolidated statements of income.

 

2. Interim Financial Presentation

 

All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended May 27, 2017 are not necessarily indicative of results for the full fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 26, 2016.

 

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rates of 35.8% and 33.2% for the three and six months ended May 27, 2017, respectively, and 35.6% and 36.3% for the three and six months ended May 28, 2016, respectively, differ from the federal statutory rate primarily due to the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation and the Section 199: Domestic Production Activities Deduction. During the six months ended May 27, 2017 and May 28, 2016, our income tax provision includes excess tax benefits on stock-based compensation in the amount of $327 and $41, respectively.

 

3. Business Combination – Licensee Store Acquisition

 

During the six months ended May 27, 2017, we acquired the operations of the Bassett Home Furnishings (“BHF”) store located in Columbus, Ohio for a purchase price of $655. The store had been owned and operated by a licensee that had determined that continued ownership of a BHF store was no longer consistent with its future business objectives. We believe that Columbus, Ohio represents a viable market for a BHF store.

 

The purchase price was allocated as follows:

 

 

Inventory

  $ 343  

Goodwill

    312  
         

Purchase price

  $ 655  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

The inputs into our valuation of the acquired assets reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 inputs as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 4.

 

The pro forma impact of the acquisition and the results of operations for the Columbus store since acquisition are not material to our consolidated results of operations for the six months ended May 27, 2017.

 

4. Financial Instruments and Fair Value Measurements

 

Financial Instruments

 

Our financial instruments include cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, cost method investments, accounts payable and notes payable/long-term debt. Because of their short maturities, the carrying amounts of cash and cash equivalents, short-term investments in certificates of deposit, accounts receivable, and accounts payable approximate fair value. Our cost method investments generally involve entities for which it is not practical to determine fair values.

 

Investments

 

Our short-term investments of $23,125 at both May 27, 2017 and November 26, 2016 consisted of certificates of deposit (CDs) with original terms of twelve months, bearing interest at rates ranging from 0.35% to 1.10%. At May 27, 2017, the weighted average remaining time to maturity of the CDs was approximately one month and the weighted average yield of the CDs was approximately 0.65%. Each CD is placed with a Federally insured financial institution and all deposits are within Federal deposit insurance limits. Due to the nature of these investments and their relatively short maturities, the carrying amount of the short-term investments at May 27, 2017 and November 26, 2016 approximates their fair value.

 

Fair Value Measurement 

 

The Company accounts for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

 

Level 1 Inputs– Quoted prices for identical instruments in active markets.

 

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 Inputs– Instruments with primarily unobservable value drivers.

 

We believe that the carrying amounts of our current assets and current liabilities approximate fair value due to the short-term nature of these items. The recurring estimate of the fair value of our notes payable for disclosure purposes (see Note 8) involves Level 3 inputs. Our primary non-recurring fair value estimates typically involve business acquisitions (Note 3) which involve a combination of Level 2 and Level 3 inputs.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

5. Accounts Receivable

 

Accounts receivable consists of the following:

 

   

May 27,

2017

   

November 26,

2016

 

Gross accounts receivable

  $ 20,217     $ 19,157  

Allowance for doubtful accounts

    (731 )     (799 )

Accounts receivable, net

  $ 19,486     $ 18,358  

 

Activity in the allowance for doubtful accounts for the six months ended May 27, 2017 was as follows:

 

Balance at November 26, 2016

  $ 799  

Reductions to allowance

    (68 )

Balance at May 27, 2017

  $ 731  

 

We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 4.

 

6. Inventories

 

Inventories are valued at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories are determined using the first-in, first-out (FIFO) method.

 

Inventories were comprised of the following:

 

   

May 27,

2017

   

November 26,

2016

 

Wholesale finished goods

  $ 27,076     $ 24,392  

Work in process

    386       369  

Raw materials and supplies

    12,630       11,343  

Retail merchandise

    27,070       26,265  

Total inventories on first-in, first-out method

    67,162       62,369  

LIFO adjustment

    (7,938 )     (7,804 )

Reserve for excess and obsolete inventory

    (1,131 )     (1,350 )
    $ 58,093     $ 53,215  

 

We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

 

 

 
9 of 38

 

 

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:

 

 

   

Wholesale

Segment

   

Retail Segment

   

Total

 
                         

Balance at November 26, 2016

  $ 1,061     $ 289     $ 1,350  

Additions charged to expense

    473       228       701  

Write-offs

    (674 )     (246 )     (920 )

Balance at May 27, 2017

  $ 860     $ 271     $ 1,131  

 

Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2017 and do not anticipate that our methodology is likely to change in the future.

 

7. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets consisted of the following:

 

 

    May 27, 2017  
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,038     $ (472 )   $ 2,566  

Technology - customized applications

    834       (278 )     556  
                         

Total intangible assets subject to amortization

    3,872       (750 )     3,122  
                         

Intangibles not subject to amortization:

                       

Trade names

    2,490       -       2,490  

Goodwill

    11,900       -       11,900  
                         

Total goodwill and other intangible assets

  $ 18,262     $ (750 )   $ 17,512  

 

   

November 26, 2016

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Intangible

Assets, Net

 

Intangibles subject to amortization

                       

Customer relationships

  $ 3,038     $ (371 )   $ 2,667  

Technology - customized applications

    834       (219 )     615  
                         

Total intangible assets subject to amortization

    3,872       (590 )     3,282  
                         

Intangibles not subject to amortization:

                       

Trade names

    2,490       -       2,490  

Goodwill

    11,588       -       11,588  
                         

Total goodwill and other intangible assets

  $ 17,950     $ (590 )   $ 17,360  

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

Changes in the carrying amounts of goodwill by reportable segment during the six months ended May 27, 2017 were as follows:

  

   

Wholesale

   

Retail

   

Logistics

   

Total

 
                                 

Balance as of November 26, 2016

  $ 4,839     $ 1,820     $ 4,929     $ 11,588  

Goodwill arising from store acquisition (Note 3)

    206       106       -       312  
                                 

Balance as of May 27, 2017

  $ 5,045     $ 1,926     $ 4,929     $ 11,900  

 

There were no accumulated impairment losses on goodwill as of May 27, 2017 or November 26, 2016.

 

Amortization expense associated with intangible assets during the three and six months ended May 27 and May 28, 2016 was as follows:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27, 2017

   

May 28, 2016

   

May 27, 2017

   

May 28, 2016

 
                                 

Intangible asset amortization expense

  $ 80     $ 80     $ 161     $ 161  

 

8. Notes Payable and Bank Credit Facility

 

Our notes payable consist of the following:

 

   

May 27, 2017

 
   

Principal

Balance

   

Unamortized

Discount

   

Net Carrying

Amount

 
                         

Zenith acquisition note payable

  $ 3,000     $ (52 )   $ 2,948  

Real estate notes payable

    1,029       -       1,029  

Total Debt

    4,029       (52 )     3,977  

Less current portion

    (3,398 )     52       (3,346 )

Total long-term debt

  $ 631     $ -     $ 631  

 

   

November 26, 2016

 
   

Principal

Balance

   

Unamortized

Discount

   

Net Carrying

Amount

 
                         

Zenith acquisition note payable

  $ 6,000     $ (108 )   $ 5,892  

Real estate notes payable

    1,219       -       1,219  

Total Debt

    7,219       (108 )     7,111  

Less current portion

    (3,385 )     95       (3,290 )

Total long-term debt

  $ 3,834     $ (13 )   $ 3,821  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

The future maturities of our notes payable are as follows:

 

Remainder of fiscal 2017

  $ 196  

Fiscal 2018

    3,412  

Fiscal 2019

    421  

Fiscal 2020

    -  

Fiscal 2021

    -  

Fiscal 2022

    -  

Thereafter

    -  
    $ 4,029  

 

Zenith Acquisition Note Payable

 

As part of the consideration given for our acquisition of Zenith on February 2, 2015, we issued an unsecured note payable to the former owner in the amount of $9,000, payable in three annual installments of $3,000 due on each anniversary of the note. Interest is payable annually at the one year LIBOR rate. The note was recorded at its fair value in connection with the acquisition resulting in a debt discount that is amortized to the principal amount through the recognition of non-cash interest expense over the term of the note. Interest expense resulting from the amortization of the discount was $19 and $57 for the three and six months ended May 27, 2017, respectively, and $46 and $112 for the three and six months ended May 28, 2016, respectively. The current portion of the note due within one year, including unamortized discount, was $2,948 and $2,904 at May 27, 2017 and November 26, 2016, respectively.

 

Real Estate Notes Payable

 

Certain of our retail real estate properties have been financed through commercial mortgages with outstanding principal totaling $1,029 and $1,219 at May 27, 2017 and November 26, 2016, respectively. The mortgages bear interest at fixed rates of 6.73%. They are collateralized by the respective properties with net book values totaling approximately $5,791 and $5,858 at May 27, 2017 and November 26, 2016, respectively. The current portion of these mortgages due within one year was $398 and $385 as of May 27, 2017 and November 26, 2016, respectively.

 

Fair Value

 

We believe that the carrying amount of our notes payable approximates fair value at both May 27, 2017 and November 26, 2016. In estimating the fair value, we utilize current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 3.

 

Bank Credit Facility

 

Our credit facility with our bank provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future.

 

At May 27, 2017, we had $1,972 outstanding under standby letters of credit against our line, leaving availability under our credit line of $13,028. In addition, we have outstanding standby letters of credit with another bank totaling $511.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

9. Post Employment Benefit Obligations

 

Management Savings Plan

 

On May 1, 2017, our Board of Directors, upon the recommendation of the Organization, Compensation and Nominating Committee (the “Committee”), adopted the Bassett Furniture Industries, Incorporated Management Savings Plan (the “Plan”).The Plan is an unfunded, nonqualified deferred compensation plan maintained for the benefit of certain highly compensated or management level employees.

 

The Plan is an account-based plan under which (i) participants may defer voluntarily the payment of current compensation to future years (“participant deferrals”) and (ii) the Company may make annual awards to participants payable in future years (“Company contributions”). The Plan permits each participant to defer up to 75% of base salary and up to 100% of any incentive compensation or other bonus, which amounts would be credited to a deferral account established for the participant. Such deferrals will be fully vested at the time of the deferral. Participant deferrals will be indexed to one or more deemed investment alternatives chosen by the participant from a range of alternatives made available under the Plan. Each participant’s account will be adjusted to reflect gains and losses based on the performance of the selected investment alternatives. A participant may receive distributions from the Plan: (1) upon separation from service, in either a lump sum or annual installment payments over up to a 15 year period, as elected by the participant, (2) upon death or disability, in a lump sum, or (3) on a date or dates specified by the participant (“scheduled distributions”) with such scheduled payments made in either a lump sum or substantially equal annual installments over a period of up to five years, as elected by the participant. Participant contributions will commence during the third quarter of fiscal 2017. Company contributions will vest in full (1) on the third anniversary of the date such amounts are credited to the participant’s account, (2) the date that the participant reaches age 63 or (3) upon death or disability. Company contributions are subject to the same rules described above regarding the crediting of gains or losses from deemed investments and the timing of distributions. The Company plans to make a contribution to the Plan effective February 1, 2018. Expense associated with the planned Company contribution was $28 for the three and six months ended May 27, 2017.

 

On May 2, 2017, we made Long Term Cash Awards (“LTC Awards”) totaling $2,000 under the Plan to certain management employees in the amount of $400 each. The LTC Awards vest in full on the first anniversary of the date of the award if the participant has reached age 63 by that time, or, if later, on the date the participant reaches age 63, provided in either instance that the participant is still employed by the Company at that time. If not previously vested, the awards will also vest immediately upon the death or disability of the participant prior to the participant’s separation from service. The awards will be payable in 10 equal annual installments following the participant’s death, disability or separation from service. We are accounting for the LTC Awards as a defined benefit pension plan. Accordingly, during the second quarter of fiscal 2017 we recorded an initial projected benefit obligation of $932 representing prior service cost. Our projected benefit obligation for the LTC Awards at May 27, 2017 is $950, which is included in post employment benefit obligations in our condensed consolidated balance sheet. At May 27, 2017, accumulated other comprehensive loss includes unamortized prior service cost of $558 with respect to the LTC Awards, net of the related deferred income tax benefit of $350.

 

Supplemental Retirement Income Plan

 

We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for the Supplemental Plan was $11,879 and $11,863 as of May 27, 2017 and November 26, 2016, respectively.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

Aggregate Pension Liability and Aggregate Net Periodic Pension Costs

 

The combined pension liability for the Supplemental Plan and LTC Awards is recorded as follows in the condensed consolidated balance sheets:

 

   

May 27,

2017

   

November 26,

2016

 

Accrued compensation and benefits

  $ 776     $ 776  

Post employment benefit obligations

    12,053       11,087  
                 

Total pension liability

  $ 12,829     $ 11,863  

 

Components of net periodic pension costs are as follows:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27,

2017

   

May 28,

2016

   

May 27,

2017

   

May 28,

2016

 

Service cost

  $ 49     $ 36     $ 87     $ 73  

Interest cost

    114       106       222       211  

Amortization of prior service costs

    24       -       24       -  

Amortization of transition obligation

    11       11       21       21  

Amortization of loss

    83       81       166       162  
                                 

Net periodic pension cost

  $ 281     $ 234     $ 520     $ 467  

 

The components of net periodic pension cost other than the service cost component are included in other loss, net in our condensed consolidated statements of income.

 

Deferred Compensation Plan

 

We have an unfunded Deferred Compensation Plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. Our liability under this plan was $1,929 and $1,969 as of May 27, 2017 and November 26, 2016, respectively.

 

Our combined liability for all deferred compensation arrangements, including Company contributions under the Management Savings Plan, is recorded as follows in the condensed consolidated balance sheets:

 

   

May 27,

2017

   

November 26,

2016

 

Accrued compensation and benefits

  $ 296     $ 296  

Post employment benefit obligations

    1,661       1,673  
                 

Total deferred compensation liability

  $ 1,957     $ 1,969  

 

We recognized expense under our deferred compensation arrangements during the three and six months ended May 27, 2017 and May 28, 2016 as follows:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27,

2017

   

May 28,

2016

   

May 27,

2017

   

May 28,

2016

 

Deferred compensation expense

  $ 82     $ 57     $ 136     $ 114  

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

10. Other Gains and Losses

 

Gain on Sale of Investment

 

In 1985, we acquired a minority interest in a privately-held, start-up provider of property and casualty insurance for $325. We have accounted for this investment on the cost method and included it in other long-term assets in our condensed consolidated balance sheet. In April of 2017 we sold our interest for $3,592 in cash, resulting in a gain of $3,267 recognized for the three and six months ended May 27, 2017.

 

Impairment of Investment in Real Estate

 

We own a building in Chesterfield County, Virginia that was formerly leased to a licensee for the operation of a BHF store. The building is subject to a ground lease that expires in 2020, but which has additional renewal options. Since 2012, we have leased the building to another party who is, as of recently, paying less than the full amount of the lease obligation, resulting in rental income insufficient to cover our ground lease obligation. Efforts to sell our interest in the building have been unsuccessful so far. We have also concluded that absent a significant cash investment in the building the likelihood of locating another tenant for the building at a rent that would provide positive cash flow in excess of the ground lease expense is remote. In addition, we obtained an appraisal during the quarter ended May 27, 2017 which indicated that the value of the building had significantly decreased and was now minimal. Given these circumstances, we concluded in the current quarter that we are unlikely to renew the ground lease in 2020 and would therefore likely vacate the property at that time. Consequently, we recorded a non-cash impairment charge of $1,084 for the three and six months ended May 27, 2017 to write off the value of the building. The carrying value of the building at November 26, 2016 of $1,108 was included in other long-term assets in our condensed consolidated balance sheet.

 

11. Commitments and Contingencies

 

We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

 

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services segment. Our real estate lease terms range from one to 15 years and generally have renewal options of between five and 15 years. Some store leases contain contingent rental provisions based upon sales volume. Our transportation equipment leases have terms ranging from two to seven years with fixed monthly rental payments plus variable charges based upon mileage. The following schedule shows future minimum lease payments under non-cancellable operating leases with terms in excess of one year as of May 27, 2017:

 

   

Retail Stores

   

Distribution

Centers

   

Transportation

Equipment

   

Total

 
                                 

Remainder of fiscal 2017

  $ 10,663     $ 2,377     $ 1,685     $ 14,725  

Fiscal 2018

    21,148       3,379       2,325       26,852  

Fiscal 2019

    19,600       2,375       1,958       23,933  

Fiscal 2020

    18,280       1,601       1,781       21,662  

Fiscal 2021

    15,986       1,349       1,169       18,504  

Fiscal 2022

    13,343       1,743       963       16,049  

Thereafter

    37,558       1,320       254       39,132  

Total future minimum lease payments

  $ 136,578     $ 14,144     $ 10,135     $ 160,857  

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $1,379 and $1,868 at May 27, 2017 and November 26, 2016, respectively.

 

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at May 27, 2017 and November 26, 2016 was not material.

 

12. Earnings Per Share

 

The following reconciles basic and diluted earnings per share:

 

   

Net Income

   

Weighted Average

Shares

   

Net Income

Per Share

 

For the quarter ended May 27, 2017:

                       
                         

Basic earnings per share

  $ 5,842       10,648,033     $ 0.55  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       74,293       (0.01 )

Diluted earnings per share

  $ 5,842       10,722,326     $ 0.54  
                         

For the quarter ended May 28, 2016:

                       
                         

Basic earnings per share

  $ 3,385       10,767,082     $ 0.31  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       145,609       -  

Diluted earnings per share

  $ 3,385       10,912,691     $ 0.31  
                         
                         

For the six months ended May 27, 2017:

                       
                         

Basic earnings per share

  $ 8,703       10,630,836     $ 0.82  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       88,009       (0.01 )

Diluted earnings per share

  $ 8,703       10,718,845     $ 0.81  
                         

For the six months ended May 28, 2016:

                       
                         

Basic earnings per share

  $ 6,619       10,773,656     $ 0.61  

Add effect of dilutive securities:

                       

Options and restricted shares

    -       142,584       -  

Diluted earnings per share

  $ 6,619       10,916,240     $ 0.61  

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

For the three and six months ended May 27, 2017 and May 28, 2016, the following potentially dilutive shares were excluded from the computations as their effect was anti-dilutive:

 

Anti-dilutive shares:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27,

2017

   

May 28,

2016

   

May 27,

2017

   

May 28,

2016

 
                                 

Unvested shares

    -       5,814       6,538       7,814  

 

13. Segment Information

 

We have strategically aligned our business into three reportable segments as defined in ASC 280, Segment Reporting, and as described below:

 

 

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. Our wholesale segment also includes our holdings of short-term investments and retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of income.

 

 

Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores.

 

 

Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s total operating costs, including those associated with providing logistical services to the Company as well as to third-party customers, are included in selling, general and administrative expenses and were $23,828 and $46,388 for the three and six months ended May 27, 2017, and $23,149 and $47,084 for the three and six months ended May 28, 2016, respectively.

 

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores and the elimination of Zenith logistics revenue from our wholesale and retail segments. Inter-company income elimination includes the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the retail consumer. The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate, and the elimination of shipping and handling charges from Zenith for services provided to our wholesale and retail operations.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27, 2017

   

May 28, 2016

   

May 27, 2017

   

May 28, 2016

 

Sales Revenue

                               

Wholesale

  $ 62,293     $ 59,906     $ 124,268     $ 119,482  

Retail - Company-owned stores

    67,144       61,943       128,737       123,538  

Logistical services

    24,626       23,810       46,960       48,489  

Inter-company eliminations:

                               

Furniture and accessories

    (29,143 )     (28,859 )     (59,013 )     (57,628 )

Logistical services

    (10,795 )     (10,133 )     (20,935 )     (20,341 )

Consolidated

  $ 114,125     $ 106,667     $ 220,017     $ 213,540  
                                 

Income from Operations

                               

Wholesale

  $ 4,783     $ 4,334     $ 10,676     $ 8,732  

Retail - Company-owned stores

    1,367       381       24       697  

Logistical services

    798       661       572       1,405  

Inter-company elimination

    652       477       992       810  

Consolidated

  $ 7,600     $ 5,853     $ 12,264     $ 11,644  
                                 

Depreciation and Amortization

                               

Wholesale

  $ 664     $ 459     $ 1,308     $ 915  

Retail - Company-owned stores

    1,496       1,529       2,968       3,060  

Logistical services

    1,195       806       2,430       1,636  

Consolidated

  $ 3,355     $ 2,794     $ 6,706     $ 5,611  
                                 

Capital Expenditures

                               

Wholesale

  $ 2,218     $ 1,454     $ 3,845     $ 2,991  

Retail - Company-owned stores

    1,211       959       4,914       2,980  

Logistical services

    133       3,135       413       8,145  

Consolidated

  $ 3,562     $ 5,548     $ 9,172     $ 14,116  

 

   

As of

   

As of

 

Identifiable Assets

 

May 27,

2017

   

November 26,

2016

 

Wholesale

  $ 135,098     $ 139,477  

Retail - Company-owned stores

    91,238       88,855  

Logistical services

    50,760       49,935  

Consolidated

  $ 277,096     $ 278,267  

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

14. Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates ASC Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Companies are allowed to select between two transition methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented, or (2) a retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures. In addition, during 2016 the FASB has issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, all of which clarify certain implementation guidance within ASU 2014-09, and ASU 2016-11, which rescinds certain SEC guidance within the ASC effective upon an entity’s adoption of ASU 2014-09. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is not permitted. Therefore the amendments in ASU 2014-09 will become effective for us as of the beginning of our 2019 fiscal year. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and have not made any decision on the method of adoption.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory within the scope of this Update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Therefore the amendments in ASU 2015-11 will become effective for us as of the beginning of our 2018 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. The amendments in ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. The amendments in ASU 2016-01 will become effective for us as of the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a differentiation between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply. The guidance in ASU 2016-02 will become effective for us as of the beginning of our 2020 fiscal year. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements, which we expect will have a material effect on our statement of financial position, and have not made any decision on the method of adoption with respect to the optional practical expedients.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costs related to debt prepayments or extinguishments, payments representing accreted interest on discounted debt, payments of contingent consideration after a business combination, proceeds from insurance claims and company-owned life insurance, and distributions from equity method investees, among others. The amendments in ASU 2016-15 are to be adopted retrospectively and will become effective for as at the beginning of our 2019 fiscal year. Early adoption, including adoption in an interim period, is permitted. The adoption of this guidance is not expected to have a material impact upon our presentation of cash flows.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 shall apply prospectively and will become effective for as at the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in ASU 2017-04 will become effective for us as of the beginning of our 2021 fiscal year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under existing GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. The amendments in ASU 2017-07 require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in ASU 2017-07 shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Early adoption is permitted, and we have elected to adopt the amendments in ASU 2017-07 effective as of the beginning of our 2017 fiscal year. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.

 

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The amendments in ASU 2017-09 will become effective for us as of the beginning of our 2019 fiscal year. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 115-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.

 

With 91 BHF stores at May 27, 2017, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.  Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service.  In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 25 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.  

 

The BHF stores feature custom order furniture ready for delivery in less than 30 days, free in-home design visits (“home makeovers”), and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are each trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.

 

We have factories in Newton, North Carolina and Grand Prairie, Texas that manufacture upholstered furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made” line of furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores. Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees in a timeframe to meet the 30 day promise.  In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture and certain upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 70% of the products we currently sell are manufactured or assembled and finished in the United States.

 

We also own Zenith Freight Lines, LLC (“Zenith”) which provides logistical services to both the wholesale and retail operations at Bassett along with other furniture manufacturers and retailers. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry, as well as the ability to provide the expedited delivery service which is increasingly demanded by our industry. Zenith operates seven regional freight hubs and 12 home delivery centers in 13 states. Approximately 55% of Zenith’s revenue is generated from services provided to non-Bassett customers.

 

At May 27, 2017, our BHF store network included 62 Company-owned stores and 29 licensee-owned stores. During the first half of fiscal 2017, we opened new stores in Garden City, New York; Culver City, California and King of Prussia, Pennsylvania, and completed the repositioning of our store in Scottsdale, Arizona. In addition, we acquired a store in Columbus, Ohio from a former licensee. We also closed an underperforming store in Danbury, Connecticut and a licensee closed a store in Toronto, Canada.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

 

 

We continue to execute our strategy of growing the Company through opening new stores, repositioning stores to improved locations within a market and closing underperforming stores. The following table shows planned store activity where leases have been executed:

 

     

Size

 

Planned

Location

Type

 

Sq. Ft.

 

Opening

New Stores:

           
Kansas City, KS

Licensed

    13,000  

Q3 2017

Pittsburgh, PA

Corporate

    12,600  

Q4 2017

Chandler, AZ

Corporate

    8,800  

Q4 2017

Wichita, KS

Corporate

    10,000  

Q4 2017/Q1 2018

El Paso, TX

Corporate

    8,400  

Q1 2018

Oklahoma City, OK

Corporate

    9,700  

Q1 2018

Frisco, TX

Corporate

    15,000  

Q4 2018

             

Repositioning:

           
Las Vegas to Summerlin, NV

Corporate

    15,500  

Q4 2017/Q1 2018

 

In addition, lease negotiations are underway for both Company-owned and Licensee-owned new store locations that would result in additional openings during 2018. With a track record of six consecutive years of positive same store sales growth and our focus on store productivity, we believe that we can take our concept to new markets and consistently grow overall store count in the years to come. We also plan to close three other stores by the end of the first quarter of 2018 after the lease term expires. We are in active negotiations to obtain improved real estate in one of those markets.

 

As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $200 to $400 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $400 to $600 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business. Because of the increased store openings in 2017, we expect to incur approximately $2,000 of additional new store pre-opening costs and post-opening losses in 2017 as compared to 2016.

 

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

 

Results of Operations – Periods ended May 27, 2017 compared with periods ended May 28, 2016:

 

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the three and six months ended May 27, 2017 and May 28, 2016:

 

   

Quarter Ended

   

Six Months Ended

 
   

May 27, 2017

   

May 28, 2016

   

May 27, 2017

   

May 28, 2016

 
                                                                 

Sales revenue:

                                                               

Furniture and accessories

  $ 100,294       87.9 %   $ 92,990       87.2 %   $ 193,992       88.2 %   $ 185,392       86.8 %

Logistics revenue

    13,831       12.1 %     13,677       12.8 %     26,025       11.8 %     28,148       13.2 %

Total sales revenue

    114,125       100.0 %     106,667       100.0 %     220,017       100.0 %     213,540       100.0 %

Cost of furniture and accessories sold

    44,981       39.4 %     42,419       39.8 %     86,879       39.5 %     84,405       39.5 %

SG&A expenses

    61,075       53.5 %     58,088       54.5 %     119,599       54.4 %     117,045       54.8 %

New store pre-opening costs

    469       0.4 %     307       0.3 %     1,275       0.5 %     446       0.2 %
                                                                 

Income from operations

  $ 7,600       6.7 %   $ 5,853       5.5 %   $ 12,264       5.7 %   $ 11,644       5.5 %

 

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and six months ended May 27, 2017 as compared with the prior year periods.

 

 
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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 27, 2017

(Dollars in thousands except share and per share data)

 

Segment Information

 

We have strategically aligned our business into three reportable segments as described below:

 

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of income.

 

Retail – Company-owned stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

 

Logistical services. Our logistical services operating segment reflects the operations of Zenith. In addition to providing shipping, delivery and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statement of income. Zenith’s operating costs are included in selling, general and administrative expenses.

 

The following tables illustrate the effects of various intercompany eliminations on income from operations in the consolidation of our segment results:

 

   

Quarter Ended May 27, 2017

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

     

Consolidated

 
                                           

Sales revenue:

                                         

Furniture & accessories

  $ 62,293     $ 67,144     $ -     $ (29,143 ) (1)   $ 100,294  

Logistics

    -       -       24,626       (10,795 ) (2)     13,831  

Total sales revenue

    62,293       67,144       24,626       (39,938 )       114,125  

Cost of furniture and accessories sold

    41,222       33,072       -       (29,313 ) (3)     44,981  

SG&A expense

    16,288       32,236       23,828       (11,277 ) (4)     61,075  

New store pre-opening costs

    -       469       -       -         469  

Income from operations

  $ 4,783     $ 1,367     $ 798     $ 652       $ 7,600  

 

   

Quarter Ended May 28, 2016

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

     

Consolidated

 
                                           

Sales revenue: